“Strategic Default” is the latest buzz term associated with foreclosure. From what we have seen, a person is strategically defaulting when they have the ability to pay their mortgage, but simply choose not to do so. The most cited reason for such strategic defaulting is that the property is simply not worth what is owed on the mortgage(s). Good thing we don’t have the same attitude about our cars, or the default rates on auto loans would be much higher than they already are. But I’m digressing from what this blog entry is about….
Many of our clients who cannot (or will not) pay their mortgages decide to go to extremes and not pay anything associated with the property. To this, we tell them that there are at least three things they should keep paying if they are able to do so:
- Hazard Insurance (including Liability coverage).
Most people also call this “Homeowner’s Insurance.” This insurance covers damages to the property, injuries incurred by visitors, tenants and residents (sometimes even when the injuries occur away from the insured property), and loss or damage to the homeowner’s personal property such as furniture, electronics, clothing, jewelry, artwork, and electronics. If you stop paying your homeowner’s insurance and let the policy lapse, the lender may force place their own insurance. However, this insurance — in addition to being extremely expensive — only covers damages to the dwelling itself in the event of fire or acts of nature. If someone breaks into the home and steals all of your belongings, or if a fire or storm destroys all of your electronics and furniture, you have no coverage from the lender’s force-placed insurance. You simply lose everything, and it’s up to you to replace it at your expense. For this reason, it’s wise to continue to pay the hazard insurance premium. Although it may have been escrowed each month with your mortgage payment to the lender, there is nothing to prevent you from paying for the policy to the insurance company directly when the premium is due.
- Homeowners’ / Condominium Association Assessments or Dues
While a lender has to produce and original note and mortgage and jump through a lot of other regulatory hoops before it can complete its foreclosure, an owner’s association has a much lower burden to bear before foreclosing on your property. For this reason, the owners association can foreclose much more quickly than a lender, and may do so in an effort to take control of the property and rent it out (even if for a short time) to a tenant in an effort to recoup unpaid assessments. If at all possible, it is best to continue paying these assessments as they come due.
- Real Property Ad Valorem Taxes
In Florida, if ad valorem taxes are unpaid for over two years, then the property may be sold at a tax deed sale. This process also is much faster than a mortgage foreclosure action. Such a tax deed sale will wipe out your ownership as well as the lender’s mortgage lien on the property, and put the new owner in possession of the property quickly. For this reason, it is best to pay taxes that are over two years old to avoid the tax deed sale possibility.
In the rush to strategically default, don’t throw out the baby with the bath water.